Pages

Tuesday, October 1, 2013

4 week tbill surge

A look at the stocks surge today and one would get the impression that
not only should the government shutdown be permanent (closing the Fed
would have a vastly different result on the S&P), but that the debt
ceiling is completely irrelevant and immaterial for risk assets. One
would get a far different impression by looking at today's just concluded 4-Week Bill[8]
auction. Today's outlier rate on the just priced $35 billion in 4-week
bills can be seen quite dramatically on the chart below, and is evidence
that someone (or someones) is getting quite nervous ahead of the events in the next few weeks.
[9]
What is going on here and why the spike? Recall what we said a week ago in "Here Is How To Trade The Debt Ceiling Showdown[10]."

... there is a simple pair trade for those who would like
to position for a contentious debt ceiling fight with an ETA
mid-October and skip the bipolar and HFT-dominated equity markets.
Recall that in the summer of 2011 when the last big debt ceiling debacle
loomed and resulted in a last minute outcome that also led to the
downgrade of the US by a rating agency that has since sold out, rates of
bills due just before the debt ceiling D-Date soared, while those
sufficiently after the ceiling interval tightened. Well, the same trade
is just as applicable this time.

Sell October 31 Bills versus 12 Month Bills

Supply dynamics and potential market concerns around a debt ceiling stand-off in Washington should push the 1M1Y bill curve flatter...
The October 31 bills are likely the most vulnerable, and should cheapen
significantly versus 12 month bills in a protracted fight.

One-month and three month bills are already trading close to zero,
having briefly traded negative last week. With bill supply to remain
flat heading into the end of October, suggesting that supply should keep
bills yields across the curve under pressure. With bill yields
largely beholden to supply dynamics, the greatest scope for further
compression is in year bills, which are currently trading around 10bp.
Given historical relationship between bills yields and bills
outstanding, year bills are roughly 3bp rich to supply-implied fair
value, while 3-month bills are about 3.5bp rich.

This trade may be difficult to put on in size until after quarter end due to dealers balance sheet constraints. But
as noted above, we believe that the market will not begin to fully
price the risk to front end bills until about two weeks before the end
date. We expect the opportunity to remain available at for the first
week of October.

Sure enough, today is the first day of the next quarter (window
dressing is over), and the bond market, if not so much the stock market,
has finally awakened that the government shutdown is merely an
indication of just how contenuous the debt ceiling negotiation very
likely ill be, and that it is increasingly likely that the X-Date of October 18 [11]may come and go without a deal, which just may result in a technical default on the nearest maturity Bills.
End result: today's auction was an absolute abortion and absent some deus ex machina agreement
between the GOP and Democrats, one can expect the October 31 bills (and
others just around them) to continue blowing wider as quietly but
confidently those holding the most at risk paper exit stage left.
But that's not all. We also noted the following:

The last go-round, the 1m1y curve flattened to 3bp.
Though the curve is just 6bp away from that right now, it is beginning
from a starting point that is 10bp flatter than one month prior to the
2011 debt ceiling. The securities that the market viewed as “at
risk” traded with yields above year bills, hence our recommendation to
sell the October 31 issue rather than the current one month bills.

[12]

We think that the curve has scope to flatten to zero, if not further, depending on how close to the wire negotiations come.

As of moments ago, the curve has gone beyond flat and into "further" as the 1M1Y just went negative.[13]

Search This Blog

Subscribe to this blog via email

Liquidity Forex System

Disclaimer and Risk Disclosure

SPECIFIC FOREX RISK DISCLOSURE STATEMENT: BEFORE PROCEEDING, YOU MUST READ AND ACKNOWLEDGE THE FOLLOWING DISCLOSURE

The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, the inter-bank market or the FOREX markets, can be substantial. You should therefore carefully consider whether such trading is suitable for you given your financial condition. Elite E Services does not control, and cannot endorse or vouch for the accuracy or completeness of any information or advice you may have received or may receive in the future from any other person not employed by Elite E Services regarding foreign currency trading or any managed account information. The factual information contained herein has been obtained from sources believed to be reliable but is NOT necessarily all-inclusive and is NOT guaranteed to be 100% accurate. The content herein is provided on a best efforts basis and is believed to be up-to-date and accurate; however, there are no explicit or implicit warranties of accuracy or timeliness made by Elite E Services or affiliates. FOREX trading involves substantial risk and is not for all investors. Investments or trading in the FOREX markets can be highly speculative and should only be done with risk capital which you can afford to lose and that, if lost, would not change or adversely affect your lifestyle. The high degree of leverage that is often possible in foreign exchange trading can work for you as well as against you. The use of leverage can lead to large losses as well as gains. Managed foreign exchange accounts can be subject to substantial charges for management and profit incentive Elite E Services, and in some cases introducing brokers’ commissions or mark-ups that are above and beyond the ordinary spread generally provided on a clearing firm’s trade execution platform. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets. Performance results may vary due to account size, starting or closing date, the number of positions and/or markets traded and/or other factors.

This brief statement cannot disclose all of the risks and other significant aspects of the foreign exchange markets. Therefore, you should carefully review the disclosures contained in this document to determine whether such trading is appropriate for you in light of you particular financial condition. There are also risks associated with utilizing an internet-based deal execution system software application, and computerized trading and money management tools including, but not limited to, the failure of the hardware and software.

PAST PERFORMANCE DOES NOT NECESSARILY GUARANTEE FUTURE RESULTS, nor does it guarantee freedom from losses. The information contained herein should not be construed as an offer to buy or sell commodities, futures, securities, or any type of investment. Elite E Services highly recommends that before making a decision, the reader collects several opinions related to the decision and verify facts from several independent sources.

ADDITIONAL WEB DISCLAIMER: ALTHOUGH IT IS POSSIBLE TO PROFIT BY TRADING FOREIGN EXCHANGE, IT IS ALSO POSSIBLE TO LOSE 100% OF YOUR DEPOSIT. THERE IS A HIGHER PROBABILITY OF LOSING VS. WINNING GIVEN ENOUGH TIME. FOREIGN EXCHANGE TRADING IS EXTREMELY RISKY AND IS ONLY FOR THE SOPHISTOCATED INVESTOR WITH AN ABOVE AVERAGE UNDERSTANDING OF CURRENCY MARKETS. RISK CAPITAL SHOULD BE USED WHEN TRADING FX SYSTEMS, DEFINED AS CAPITAL THAT ONE CAN AFFORD TO LOSE 100%. ANY INVESTOR MUST CONSIDER THE RISKS OF FOREX TRADING AND DETERMINE IF IT IS APPROPRIATE FOR HIM or HER.

THIS WEBSITE IS NOT A SOLICITATION TO INVEST IN FOREIGN EXCHANGE SYSTEMS, THIS WEBSITE DOES NOT RECOMMEND ANY PARTICULAR INVESTMENT.